Credit scores: ‘The calm before the storm’

The economic downturn could have lasting structural impacts.

June 1, 2020

The economic effects of the COVID-19 pandemic are not yet reflected in consumer credit scores, according to Craig Wilson, senior director of consulting decision analytics at Experian.

However, he describes this nondevelopment as “the calm before the storm.”

“Due to CARES Act reporting guidelines, consumers are beginning to migrate up the risk spectrum,” says Wilson, who addressed a virtual roundtable about the effects of the coronavirus (COVID-19) on credit quality, sponsored by the CUNA Lending Council.

According to Experian data from the end of January through May 9:

  • 21% of consumers had no change in credit score.
  • 84% of consumers remained in the same risk tier.
  • 55% of consumers increased their score value.
  • 26% increased their score value more than 10%.

Forgiveness programs have suppressed delinquencies to some extent, Wilson says, and lenders’ approach to handling delinquencies varies. Some use deferments while others use forbearance or special codes designating the circumstances.

“You need to have insight as to what’s going on in the credit scoring environment,” he says.

The economic downturn could have lasting structural impacts, Wilson says. Similar to the Great Recession, which affected the housing market, the current downturn is affecting specific industries, such as travel, retail, and restaurants.

A slowdown in indirect lending due to auto dealer closures has affected many credit unions, he notes. But credit unions need to be ready as these business reopen.

As more consumers access their accounts digitally, the risk of fraud increases, Wilson says. Consumer assistance efforts such as credit line increases, relaxed collection efforts, and flexible payments create ripe opportunities for fraudsters.

“While these opportunities are member friendly, they’re also enticing to fraudsters,” he says. “It provides them with a little more leeway to exploit opportunities and run with the vulnerabilities they’ve identified within your organization.”

The financial stress created by the pandemic has also created a higher risk for first-party fraud.

“There’s an increase in the propensity for the intentional misuse of credit and other types of loan fraud,” Wilson says.

He suggests creating some layer of “friction” during the loan application process when necessary to deter fraud, and implement “layered fraud control” during the member life cycle.